Clarifying the debate over the Bush-era tax cuts

Political pronouncements have never been noted for their intellectual rigor. Unfortunately, that seems to be even more true this election season. Republicans are making statements that are bouncing off the bottom of the "truth-o-meter" and the responses from Democrats are not much more enlightening. As a retired academic, I tend to appreciate supporting evidence in discussions, which I don't believe is too much to ask.

One area with far more heat than light at present is in regard to what level of taxation is most socially advantageous for those Americans in the top tax bracket. The situation of course is that, for political expediency at the time, the Republican-controlled Congress early in the George W. Bush years lowered personal income taxes starting in 2001. But the new tax rates were written to expire in 2011 to make 10-year budget projections appear less onerous in terms of the deficit. The battle now is whether to keep the lowered personal tax rates in effect for all taxpayers or only for those wages below the top income bracket, which is usually stated as being $250,000. If the lowered tax rates are retained for the lower brackets, then even those making more than $250,000 a year would see the lowered rates on the first $250,000 of their income.

So the argument is really over whether the reduction in taxes on income for an individual of more than $250,000 is the best way to stimulate the economy or whether the top tax bracket should be allowed to rise to 39.6 percent from the current 35 percent and that tax revenue used to revive the economy in other ways. (If the top bracket were to rise, the extra tax on a taxable income of $500,000 would be $11,500 or 2.3 percent of the taxable income. Of course, taxable income is typically far less than a person's actual income because of the many deductions and loopholes available to those with higher incomes.)

The Congressional Budget Office in a recent report stated that of the 11 options that it reviewed, extending all of the tax cuts was the least likely to help the economy. (Policies for Increasing Economic Growth and Employment in 2010 and 2011; January 2010; Congressional Budget Office, Washington D.C.) I have yet to hear an argument from those proposing to leave the top marginal tax rate at 35 percent as to why they believe that CBO analysis is incorrect. The CBO is well regarded for its nonpartisan economic research and thus its conclusions should not simply be disregarded.

The following are the options considered by the CBO listed in the order of effectiveness according to its analysis:

–Increasing aid to the unemployed

–Reducing employers' payroll taxes

–Reducing employers' payroll taxes for firms that increase their payroll

–Reducing employees' payroll taxes

–Providing an additional one-time Social Security payment

–Allowing full or partial expensing of investment costs

–Investing in infrastructure

–Providing aid to states for purposes other than infrastructure

–Providing additional refundable tax credits for lower- and middle-income people

The CBO's top option – increasing aid to the unemployed – has been stated by some political observers as being politically dead on arrival despite having both strong humanitarian and economic factors in its favor. One economic argument is that the unemployed will quickly spend any additional money they receive, thereby giving a strong "multiplier" effect to the expenditures. The same cannot be said for the lowest option cited by the CBO. The wealthiest are not expected to rush out and spend any extra cash received from tax reductions. Rather they will likely invest it where it will chase low-yield financial instruments rather than being put to work creating jobs. Since some of the highest-yielding investment opportunities are currently overseas, it's likely at least some portion of such tax cuts would fund foreign industries that will compete with our struggling domestic efforts.

Others have pointed out that many of those in the top brackets include investment bankers and stock brokers who have never been noted as creating much in the way of jobs and that many of these individuals have been roundly accused of being responsible for the current economic mess. So while many on the right condemn the government for "bank bailouts," they're strongly advocating a tax plan that will reward these same investment bankers and others responsible for the current economic mess.

In a cursory check of what information I can find on the Internet, I've not been able to find anything that seems to indicate a meaningful correlation between tax rates and the growth of gross domestic product. The year-to-year growth in GDP has bounced between highs and lows when no change in tax rates occurred. For example, the GDP fell in 1982 to a -1.9 percent while bouncing up to a high of 7.2 percent in 1984 while the top tax rate on earned income remained unchanged at 50 percent from 1972 through 1986.

It has been cited occasionally that the economy did moderately well following the tax increases during the early years of the Clinton administration, while it did poorly following the tax cuts during the early George W. Bush years. During what is considered one of the longest sustained growth periods, from around 1947 to 1973, the top marginal rates were at or over 70 percent and were at 91 percent for much of that period. The top marginal rates were 70 percent from 1976 through 1978, yet the growth in GDP in these three years was well over 4 percent. This leads me to believe that a modest increase in the top marginal rates is not going to result in many earners making, say, $750,000 just going home and pulling the covers over their heads because they're not making $773,000 because of taxes. Of course, there are always a multitude of factors influencing these events, but I can't see the justification for claiming that tax cuts are the key to economic revival.

The CBO's second- through fourth-most favorable options are also types of tax cuts. However, these have not been seen with the same cachet with which many view cuts to top earners. Perhaps looking beyond a simple call for "tax cuts for all" is too wonkish for most voters. But I don't really understand how the right can in good conscience condemn the current national debt while calling for a tax policy that will make it far worse. There's simply no way that discretionary government spending would be cut enough to make up for the loss of revenue from continuing the current top-bracket rate rather than raising it.

I'm sorry to see infrastructure so far down on the list of desirable options. Investment in infrastructure at some point in the near future will be absolutely essential to the continued vitality of the country. I've never been able to understand how we could afford to build the massive interstate highway system but have never believed we could fully maintain it. At the present time, there is a large backlog of repairs for simply repaving vast stretches and for replacing many bridges that are no longer able to handle heavy trucks. And this is only the highway system; there are numerous other infrastructure repairs and upgrades that need to be done to water, sewer and electrical systems as well as other essential systems. The cost of repairs compounds as the infrastructure degrades; it will be much more expensive to repair them in a few years than it is today.

Given that these infrastructure repairs must be done, now would seem like a good time to do it as material and labor costs are much less now than they will be when the economy recovers and, since we seem to prefer to do much of this work by issuing bonds, financing rates are about as low as they will ever be. Thus not only would such activities provide construction jobs, which would pump money into the economy, it would provide a solid basis for continued growth.

Taxation has become almost a religious issue. We seem all too willing to eat our seed corn by allowing our infrastructure to deteriorate so that we can keep spending our personal dollars on cheap electronics and stuffed animals from China. I, for one, would be happy to spend a bit more in taxes to keep from having to drive over the potholes in the interstate and having to spend money for periodic front-end realignments. Somehow there seems to be a bias that spending money for taxes for road repairs is bad where as spending an even larger amount for damaged tires or vehicles is an increase in the GDP.

I guess I can only dream that some day we will actually be able to do a rational cost-benefit analysis on our economy using a common set of standards. Until then, however, I ask that those espousing political positions to back them up with at least reasoned arguments if not a strong collection of objective facts.